Generation is generally wealthy enough, but how Golden Years are paid for is changing

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While Boomers are more likely than younger workers to have defined-benefit pension plans and certain other advantages — that's particularly true of older Boomers — many may wind up financially ill-prepared for retirement.

Will the old thirtysomething gang still be showing up for work at seventysomething?

That could be the case for many of their real-world contemporaries if they hope to enjoy financially secure retirements.

Baby Boomers, with their inheritances, homes, and old-fashioned pensions, may appear to be on track for a solid retirement — but some experts say the forecast for the generation born from 1946 through 1964 isn’t necessarily so rosy.

While Boomers are more likely than younger workers to have defined-benefit pension plans and certain other advantages — that's particularly true of older Boomers — many may wind up financially ill-prepared for retirement unless they work longer and save more.

The recent financial crisis took a toll on wealth; inheritances on average won’t be that big; traditional pension benefits are phasing out; and many shop-till-you-drop Baby Boomers simply haven’t saved enough money to last through retirements that should stretch beyond those of previous generations, economists note.

“The majority of today’s retirees are able to afford a decent retirement. However, this group is living in a 'golden age' that will fade as Baby Boomers and Generation Xers reach traditional retirement ages in the coming decades,” states an October 2009 report led by Alicia Munnell, director of the Center for Retirement Research at Boston College.

“This gloomy forecast is due to the changing retirement income landscape. Baby Boomers and Generation Xers will be retiring in a substantially different environment than their parents did,” the report notes, citing longer life spans and retirements and declining “replacement rates” — retirement income as a percentage of pre-retirement income.

As of 2009, in the wake of the housing and stock market crises, some 51 percent of U.S. households were at risk of being unable to maintain their pre-retirement standard of living at age 65, the authors calculated in their report, "The National Retirement Risk Index: After the Crash". Some 41 percent of early Boomers, 48 percent of late Boomers and 56 percent of Gen Xers were at risk, they said.

The financial crisis, however, can’t be blamed for everything.

“They weren’t prepared even before the crisis,” Munnell told CNBC recently. The report noted that two years earlier, 37 percent of early Boomer and 43 percent of late Boomer households were at risk

“The gist of this whole story is that retirement ages are increasing as people live longer and health care costs rise, and at the same time the retirement system is retracting,” says Munnell.

Eligibility for full Social Security Insurance benefits is gradually rising from age 65 to 67, Medicare premiums will account for a bigger chunk of spending, increasing numbers of households will be taxed on their benefits, “and people really don’t save on their own,” says Munnell.

Some researchers believe most Baby Boomers are indeed wealthy enough to maintain their pre-retirement consumption, notes David Wise, an economist at the Harvard Kennedy School of Government. Wise, however, says it’s instructive to look at the real financial status of elderly retirees near the end of life.

“When you look at it that way it doesn’t look as favorable,” he says.

In a recent study, Wise and two colleagues found that “a substantial fraction of persons die with virtually no financial assets — 46.1 percent with less than $10,000 — and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support.”

Based on a replacement rate measure, “many of these households may be deemed to have been well-prepared for retirement, in the sense that their income in their final years was not substantially lower than their income in their late 50s or early 60s,” the study notes. “Yet with such low asset levels, they would have little capacity to pay for unanticipated needs such as health expenses or other financial shocks or to pay for entertainment, travel, or other activities. This raises a question of whether the replacement ratio is a sufficient statistic for the 'adequacy' of retirement preparation.”

Given these findings, expectations of a life-saving wealth transfer to the Baby Boomers may be overblown. Maybe half the Baby Boomer population will inherit money from parents, with a median amount of $40,000, according to Boston College’s Munnell.

“It’s not going to be enough,” she says.

People increasingly will rely on their 401(k) retirement plans, but the savings rate isn’t reassuring.

According to BC’s Center for Retirement Research, 62 percent of workers were covered only by traditional defined-benefit pension plans in 1983, compared with 17 percent in 2007. Those covered exclusively by 401k plans increased to 63 percent from 12 percent during the period.

“In theory 401(k) plans could provide adequate retirement income, but many individuals make mistakes at nearly every step along the way,” the center’s report states, citing research showing that the median 401(k) and IRA balance for those near retirement was $78,000.

Annamaria Lusardi, economics professor at the George Washington University School of Business, points to a general lack of financial literacy and planning.

“A sizable group of the population has not even thought about retirement, so there are a lot of people that are approaching retirement without any preparation for it,” she says. “Even for the Baby Boom generation I think there are worries about a good fraction of them potentially not experiencing a good retirement.”

Many people see retirement as a distant stage even if it’s only five years away, and expect to keep working even though their employment situation may not evolve that way, says Lusardi.

She also says retirement planning can be a “sophisticated calculation” that chief financial officers with MBAs handled for traditional pension plans. Now many workers must decide how to invest their own retirement wealth in 401(k)s and IRAs, as other major financial forces —spending on children’s college education, accumulation of credit card debt — take a toll on retirement savings.

The challenge may also be compounded by the boom-bust cycle of the housing market. Many people took money out of their homes through refinancing packages, lowering their equity stake. Even for those who did not do so, the subsequent price slump has eroded equity, taking a bite out of what’s been a traditional retirement nest egg.

“I think it’s very important that we provide ways to help workers make good decisions about retirement,” says Lusardi, suggesting that employers provide financial education programs.

“It’s basically a very mixed bag. Richer Baby Boomers will do better than previous generations,” while the poor will do worse as pensions disappear for many workers, Massachusetts Institute of Technology economics professor Jonathan Gruber said. The extremes in income distribution seen during the working years endure in retirement, with the wealthy in each generation doing better and children of the rich becoming rich themselves, he says.

The amount of income needed in retirement is a subject of disagreement. While the Department of Labor and financial planners recommend an 80 percent replacement rate, some consider that standard too high.

An Urban Institute report this year called the 80 percent rule of thumb “misguided,” stating that Americans aren’t necessarily saving too little, but need to save enough so that spending doesn’t need to drop sharply in retirement.

Economist John Turner, director of the Pension Policy Center in Washington, D.C., thinks retirees above the poverty level should do OK with at least 60 percent of pre-retirement income, and suggests saving 10 percent of earnings for retirement is enough. That’s more than most people are saving, however, he notes.

“The way out of this box is to work longer," says Boston College’s Munnell "Now that’s harder in this environment where we have high levels of unemployment, but that’s really in the end what’s going to keep people financially sound. If people work until age 70, I think the vast majority of people would be perfectly fine in retirement.”